New York's high court finds jurisdiction over foreign bank on basis of correspondent bank account activity

Letter from America

In a ruling that three dissenting judges warned would "have grave implications for correspondent banking relationships," New York's Court of Appeals has reinstated claims against a Swiss bank after concluding that its alleged use of New York correspondent accounts was sufficient to establish personal jurisdiction over it. This decision, Al Rushaid v. Pictet,1 reflects the increasing willingness by New York courts to exercise personal jurisdiction over foreign banks in cases where funds transferred through New York correspondent accounts are, in some manner, allegedly related to plaintiff's claims.

Foreign bribery scheme orchestrated on foreign soil

The dispute in Al Rushaid centers on conduct that occurred far from US shores. The plaintiff, a Saudi oilman, alleges that a private bank based in Geneva ("Pictet") and its officials assisted former employees of his Saudi corporation ("ARPD") in a money laundering scheme. As alleged, the ARPD employees, who were responsible for procuring vendors in connection with a Saudi oil rig contract, accepted bribes and kickbacks from these vendors. Pictet and its officials allegedly knew these employees well, assisted them in registering a ‘bogus’ corporation in the British Virgin Islands to conceal their ill-gotten gains, and maintained bank accounts in Geneva for both the employees and the bogus corporation.

The only alleged US connection in Al Rushaid is that the ARPD employees issued invoices to vendors directing them to make payments - bribes and kickbacks - to Pictet’s New York correspondent accounts for the benefit of their bogus corporation. According to the complaint, once those payments were made, Pictet credited the Geneva account of the bogus corporation, and subsequently transferred those funds into the personal Geneva accounts of the ARPD employees.

Lower courts find insufficient basis to retain jurisdiction

The trial court and intermediate appellate court in New York rejected the plaintiff’s claims, finding that there was an insufficient basis to assert personal jurisdiction over Pictet based on its receipt of funds from third parties into New York correspondent accounts. In reaching this conclusion, these courts followed the traditional rule: mere maintenance of New York correspondent accounts, standing alone, is insufficient to subject a foreign bank to jurisdiction in New York.

Court of appeals reverses lower courts, finds jurisdiction

Plaintiffs appealed the dismissal of their claims to New York’s Court of Appeals, arguing that they alleged more than Pictet’s maintenance of New York correspondent accounts and passive processing of transfer instructions. Plaintiffs argued that they sufficiently alleged the repeated, purposeful misuse by Pictet of its New York accounts in support of a money laundering scheme, and that these allegations fit neatly within the parameters set forth by the Court of Appeals in a 2012 opinion which found jurisdiction over a foreign bank based on allegations that it purposefully routed transfers from abroad through its New York correspondent account to allegedly aid and abet terrorism.

In a 4-3 opinion, the sharply-divided Court of Appeals agreed with the plaintiff and reinstated the claims against Pictet. The Court drew analogies to its 2012 opinion, and found that the allegations were sufficient to establish that Pictet was "no innocent banker," but rather one alleged to have intentionally assisted a money laundering scheme, shared in the goals of that scheme, and used its New York correspondent accounts to guarantee the scheme’s success.

There is, however, at least one material distinction: unlike in the 2012 case, Pictet was not responsible for routing any of the alleged illicit transfers on behalf of its foreign customers to correspondent accounts in New York. Here, it was third party vendors, acting on invoices issued by ARPD employees, who sent payments as instructed to Pictet’s New York correspondent account. In dismissing this distinguishing fact, the Court held that "a foreign bank with a correspondent account … that repeatedly approves deposits and the movement of funds through that account for the benefit of its customer is no less ‘transacting business in New York’ because the customer, or a third party at the customer’s direction, actually deposits or transfers the funds to New York."

The focus of the Court’s jurisdictional analysis was on Pictet’s "conduct vis-à-vis [its] correspondent bank, meaning how it uses the correspondent accounts." In concluding that this correspondent activity was sufficient to establish jurisdiction over the bank, the Court appeared convinced by the allegedly purposeful nature of Pictet’s conduct, the fact that the ARPD employees and the bogus corporation it helped them to establish were
Pictet’s clients, and the repeated nature of the transfers from Pictet’s New York correspondent accounts to the illicit Geneva accounts. The Court attempted to distinguish these facts from what it described as "passive," inter-bank correspondent transfer activity, which, of course, includes the processing of international fund transfers initiated by non-customers.

The Court acknowledged that the jurisdictional analysis in cases like Al Rushaid is fact-intensive, requiring an assessment of the "quantity and quality" of the foreign bank’s contacts with the correspondent bank. Under this test, "jurisdiction is proper even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted." It is not entirely clear from the Court’s opinion precisely what "purpose" Pictet manifested in New York, other than to maintain correspondent accounts for its Geneva branch. Although it appears that Pictet’s failure to "ignore or reject" the alleged tainted deposits into its New York accounts was central to its holding.

Dissent warns of upending over forty years of precedent

Three dissenting judges warned that the majority opinion risked "upending over forty years of precedent." The dissent was particularly concerned that the conduct that the majority found to be "purposeful" on Pictet’s part was in fact the "unilateral choice" of third parties to direct funds to Pictet’s New York correspondent accounts. The dissent cites long-standing precedent that "a foreign entity must initiate purposeful contact with New York, beyond mere maintenance of a correspondent account, in order for its relationship with a New York bank to form the basis for the exercise of personal jurisdiction" and concludes that the majority’s opinion flouted the traditional rule finding the existence of correspondent accounts insufficient to establish jurisdiction. Especially notable is the dissent’s clarion warning that only confusion can result: the majority’s "retreat from that principle eschews the clear and predicable rules that are importance in this area of the law."

Conclusion

The Al Rushaid decision demonstrates that US courts are increasingly willing to exercise jurisdiction over foreign banks on the basis of their US correspondent banking activity. It remains to be seen if, as a concurring judge asked, Al Rushaid will "chill" correspondent banking in one of the world’s pre-eminent financial centers; that judge answered his own question with a terse, "so be it," if that were the price for curbing money laundering and illicit financing. Financial institutions operating outside of the United States must now recognize that whether a New York court may exercise jurisdiction over them for their ubiquitous reliance upon US correspondent accounts may turn on the adequacy of their compliance programs to detect potential money-laundering activity in those accounts.

The Al Rushaid decision is final. The only recourse the defendants have is to file a petition for certiorari with the US Supreme Court to contest whether the Court of Appeals’ decision violates the Fourteenth Amendment of the US Constitution, which constrains a State’s authority to assert jurisdiction over a nonresident defendant by requiring that the defendant have "certain minimum contacts" with the forum State. The Supreme Court rejects approximately 96% of the petitions filed in such paid (i.e., non-indigent) cases each year.

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.